The paper studies the relationship between economic growth and financial conditions, assessing whether financial risk indicators are able to anticipate recessions. We propose an econometric model for the conditional distribution of GDP. The model is based on an asymmetric Student's t-distribution in which the parameters representing the location, volatility and degree of asymmetry vary over time and can be directly influenced by risk indicators.
The empirical analysis shows that in the last two decades US GDP growth has been characterized by an increase in asymmetry and in downside risks. These are mainly attributable to the uncertainty and to the financial conditions summarized by the NFCI (National Financial Conditions Index) of the Chicago Federal Reserve. By evaluating the different components of this index, we find that volatility is more related to leverage indicators while asymmetry is equally affected by all components.
